Bouygues, Orange make new calls in French telecom turf war

Paris (AFP) - The French telecom sector is in a new round of turbulence, with two takeovers in the air.

Shares in the Bouygues group and in Orange, formerly France Telecom, rose sharply on Friday on strong signs that a tie-up that would result in the number of mobile operators dropping from four to three is possible.

This comes in a context of recent big deals in the wider European telecom sector.

The French Bouygues conglomerate, with interests in construction and television, is now in talks to sell its loss-making telephone subsidiary Bouygues Telecom to Orange, a source close to the matter told AFP.

Bouygues is acting on the rebound after losing out in a bitter bidding battle to win control of ailing SFR, which French media giant Vivendi had put up for sale.

Also on Friday, small upstart cable operator Numericable, owned by Altice, fresh from winning the battle for SFR, pounced again, announcing it was in exclusive talks to buy Virgin Mobile.

The talks were on the basis that Virgin Mobile, which does not have a network of its own, and its parent Omea Telecom, were worth 325 million euros ($445 million).

Virgin Mobile, with 1.7 million customers, operates by renting transmission capacity from operators such as SFR or Orange.

Numericable, in buying Virgin, would therefore be able to improve the usage of its own infrastructure.

- Race for economies of scale -

"It is a race for size, and for economies of scale which will help to absorb the cost of investment in networks, and also in a way to prevent the competition from enlarging its client base," said Philip Pestanes, a telecoms expert at management consultancy Kurt Salmon.

The same factors are driving the reported talks between Bouygues and Orange, formerly the French state monopoly France Telecom.

French Economy Minister Arnaud Montebourg has said he thinks that the French market can only support three big operators, but consumer groups argue that the new high level of competition has broken up cosy market shares and brought lower prices and better conditions consumers.

Orange has 27 million mobile phone and 10.1 million fixed-line customers in France, as well as a big international reach.

SFR has 21.3 mobile customers and 5.3 million Internet service subscribers.

SFR-Numericable will have about 28.3 customers overall, of which 1.7 million come from the smaller Numericable.

Free, the irreverent player which has disrupted the market and provoked the deal-making with a price war, has 14.3 million customers, overtaking Bouygues Telecom with 11 million mobile and 2.1 million fixed-line clients.

This penetration of the market by Free was greatly helped by an agreement with Orange which allowed Free to rent transmission capacity while it developed its own network.

This strategy by Orange explains to a large extent how Free has been able to undercut and weaken Bouygues and SFR, to the point that they have both looked for partners, which would have the effect of eliminating a big competitor.

Also on Friday, the self-made tycoon behind Free, Xavier Niel, tied up in Monaco his acquisition of small operator Monaco Telecom, previously controlled by British group Cable and Wireless Communications.

The price of Bouygues shares was showing a gain of 4.23 percent to 33.03 euros to lead the French CAC 40 index which was up 0.13 percent.

Shares in Orange were up 1.02 percent to 12.39 euros.

"Traders are counting on a deal between Orange and Bouygues," said stock trader Yves Marcais at Global Equities.

But he warned that anti-trust regulators could impose conditions to ensure competition.

- Bouygues telecom operating loss -

The latest takeover talk emerged just after Bouygues Telecom announced a cost-cutting plan to save 300 million euros ($412 million) and warned that jobs were at risk.

Late on Thursday, the overall Bouygues group reported that exceptional items had enabled it to avert a loss in the first quarter, reporting a net profit of 285 million euros.

But the telecom division reported a current operating loss of 19.0 million euros.

Bouygues had been pushed into loss last year by the fall in the value of its stake of nearly 30.0 percent in French engineering group Alstom, itself a target of bid moves

Stock trader Marcais commenting on Friday on the outlook for the telecom business, said that "the best option for Bouygues would be to dispose of the activities which are weighing it down the most."